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Executives

Richard Williams - IR

Jim Mooney - Chairman

Neil Berkett - Acting CEO

Jacques Kerrest - CFO

Analysts

Bryan Kraft - Credit Suisse

Tom Eagan - Oppenheimer & Company

Ben Swinburne - Morgan Stanley

Paul Howard - Cazenove

Omar Sheikh - Dresdner Kleinwort

Joe Boorman - New Street Research

David Kestenbaum - Morgan Joseph

Simon Weeden - Goldman Sachs

Steve Malcomb - Arete Research

Jerry Dellis - JP Morgan

Steve Scruton - HSBC

Virgin Media, Inc. (VMED) Q3 2007 Earnings Call November 7, 2007 9:30 AM ET

Operator

Good day, ladies and gentlemen and welcome to the Third Quarter 2007 Virgin Media, Inc. Earnings Call. My name is Lacey and I'll be your operator for today's call. At this time, all participants are in a listen only mode. We will conduct a question and answer session towards the end of this conference (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Richard Williams, Investor Relations Director. Please proceed.

Richard Williams

Thank you operator. Good morning or afternoon to you all and welcome to Virgin Media's Q3 results call. The presenters on today's call are Jim Mooney, Virgin Media's Chairman; Neil Berkett, Acting CEO; and Jacques Kerrest, our CFO.

Please, can I draw your attention to the Safe Harbor statement on slide two and remind you that some of the statements made today may be forward-looking in nature and that actual results may vary significantly from these statements. I would also ask you to refer to our latest filings with the SEC for applicable risk factors.

Now I'll turn over to Jim Mooney.

Jim Mooney

Thanks Richard and good afternoon everyone. Well, as you know, we have just completed our second full quarter as Virgin Media and I believe we are now starting to see the vision we all had of the great brand, the great products and solid financial discipline all coming together.

The third quarter has shown a significant improvement in customer and RGU growth as the team has been working hard on customer segmentation, bundled pricing and rolling out our mobile offering into existing double and triple play combinations.

We have aggressively attracted new customers and retained existing customers through compelling bundled price points, product quality and our strong brand marketing efforts.

Our customer and RGU net add performance, are both excellent. In fact, on many measures, this was the best quarter since the merger of NTL and Telewest with the power of the Virgin brand taking hold.

So, let's take a quick look at the team's accomplishments in the quarter.

We had a record quarter for customer gross adds and net adds. We also had a record quarter for broadband net adds, telephony net adds and total cable RGU net adds. TV net adds have shown significant improvement over quarter two.

We have also achieved solid OCF growth in the quarter, which includes certain second half benefits pulled exclusively into the third quarter. These were driven by the operational improvements we've been counting on all year long such as reduced bad debt expense, lower headcount, lower employee expenses and the like. So, the fact that they got pulled into the third quarter is an accounting treatment, but they're certainly all what we counted on to drive second half OCF.

In broadband, we have increased our lead over our competitors with our 20 MB service and are now looking at how we can further extend this differentiation in the coming quarters.

In TV, our on-demand services continued to be highly popular with our customers. You'll hear a lot about that from Neil in a moment. The inclusion of Setanta Sports and our top basic TV package has also helped to successfully drive up, sell and reduce churn. You'll hear more about our intense focus on churn in a moment, as well.

The turnaround in our telephony growth is ahead of our expectations but very consistent with our segmentation and use of the mobile product to stem the tide on telephony. And, if you include our off-net business, we grew our telephony RGUs in the quarter, which represents an excellent turnaround.

As a triple-play incumbent, we obviously have pricing within our existing customer base that is different than our acquisition pricing. Historically, we've been managing this carefully but I believe, in a little bit too much of a reactive mode and that's restricted our ability to grow our customer base through both acquisition and reduced churn.

We have now decided that the optimum way to create medium to long-term value is to manage our pricing more proactively. Value for money is a core Virgin attribute. With the deployment of portfolio knowledge and skills, we believe we can manage pricing with limited impact on ARPU and OCF while driving much stronger subscriber and RGU growth and you've seen that in the third quarter.

Right now some of the new entrants into our product markets are reducing their profits to give away products and services, really just to support their existing businesses. As demonstrated today, we do not need to do that. We intend to successfully balance RGU growth, ARPU, OpEx, OCF and cash flow to compete effectively in a competitive market.

I think we have a robust and sustainable business model and it's predicated on multiple strengths. We have compelling product bundles, which are driving the triple-play penetration up and up and up and customer loyalty. We are selectively protecting and managing our ARPU and margins.

We are making, very focused investments. We talked about VoD, mobile, etc to differentiate our consumer proposition. We are targeting our marketing spend to really exploit the power of the Virgin brand. We've been attacking our underlying cost base to drive out inefficiency and support our investment in pricing. You've seen that again, in spades in the third quarter.

And finally, we are working very hard with regulators to ensure a level playing field and are very pleased by their enthusiasm and their willingness to listen to what we have to say.

So, I'm very pleased with the lifetime value discipline that management under Neil's leadership has put in place and endorse the value creation strategy. You can see the positive impact the strategy has already had on Q3 customer and RGU growth.

You might have known, we just added Mark Schweitzer, the former CFO of Sprint Nextel, to come in and help us run the whole consumer business. So that's a great addition by Neil.

So, let me turn it over to Neil now, who's been the chief architect of this strategy, to take you through more detail on the quarterly performance and to update you on the strategic direction of the company as we wind up 2007 and head into next year. Neil?

Neil Berkett

Thanks, Jim. I want to start by updating you on where we are in the transformation of our business. After the merger of NTL and Telewest we had two options, integrate the companies under common systems and practices then make the necessary change improvements to the combined company or try to integrate and make changes at the same time.

We believed that to try to do the latter would have resulted in delay, overruns and quality issues as we try to do too many things at once and that would have meant that I could not sit here today and say that within the next few weeks, the integration will be largely complete. I want to use that as a philosophy going forward. Do less and do it well.

We correctly chose to ensure that we had one combined business, based largely on the superior ex-Telewest system before making the necessary changes to reengineer the business and continue to fix the fundamentals. The integration has been a great success and will be substantially complete by the end of Q4.

The final consumer billing system migration has been undertaken with just broadband provisioning remaining outstanding. The ERP integration, duplication removal and procurement synergies are all complete. I am particularly pleased, the way in which the last billing migration came, given that that was one of the core problems we had in the old NTL business.

As a result, we have secured substantial synergy savings. Alongside that, of course, we've invested in improving our brand and marketing, made further investments in customer service as well as significant content initiatives in order to position ourselves for better customer and RGU growth which we are now starting to see.

We spoke at the Q2 results of our phase two of OpEx reengineering and restructuring that we would be targeting in 2008 and beyond. We're continuing to pursue our plan to reducing overall OpEx. Although, there will continue to be some OpEx cost increases going the other way, such as the content initiatives we've undertaken like Setanta, as well as inflation and the non-recurrence of some benefits this quarter.

I'm confident that we can continue to reduce overall underlying OpEx. In fact, as an incumbent with a short-term gross margin challenge due to the existing pricing on our installed base, we absolutely need to continue to reduce OpEx further to grow our cash flows in the short-to-medium term.

I would echo what Jim has said about the strength of our business model. In a fiercely competitive market, where others are taking hits to their profits to continue to grow, our unique cost structure and economics allow us to manage the RGU growth, ARPU equation, make selective investment where required and be disciplined on OpEx and efficiency to grow this business in the medium to long-term.

This reengineering phase is well underway and we're putting the same priority focus and energy into fixing the fundamentals of the business as we did and to ensuring that the integration went so well.

In this phase, we are concentrating on taking the bad costs out of the business. For example, and I'll come back to this in a little bit more detail later on, we are focused on our product fault rates which drive down costs in multiple ways.

Clearly, engineering effort to react faults are reduced, customer contact centers take fewer customer complaints and ultimately, customer losses as customers get fed-up with faults and they leave us.

We're continuing to work to understand in depth, what really pleases our customers and what displeases them. With the introduction of best-in-class practices, we can now tell down to each individual customer touch point, be that customer interfaced with an installation engineer, salesperson or technical services engineer, what customers liked and what they didn't like about that experience.

This is what would enable us to make effective change and the right effective change. The integration and the reengineering efforts will provide a platform for growth, specifically by reducing churn through service improvement, proactive churn prevention through segmentation and new knowledge management systems.

We will also grow through real product differentiation, building on our existing Video on Demand platform and delivering premium broadband to drive acquisition, up-sell and retention. We will place higher focus on up sell and cross sell at multiple customer touch points, to grow triple and quad-play and we will continue to exploit the mobile cross sell opportunity we have into our cable base.

Next, I want to take you through the success that we have been having at adding customers and RGUs in the quarter. Despite the highly competitive trading environment, we have increased our customer base in Q3, due to an improvement in both gross adds and churn.

Gross adds were up 34% on the quarter two and 12% year-on-year to 257,000 on-net, providing confidence that our products are attractive to customers, represent great value and also that our restructured sales teams are working well.

Despite Q3 being a seasonally higher churn quarter, we were able to reduce churn to 1.7% and churn has been improving throughout the quarter.

We're getting better at saving customers, but, more importantly, we are now proactively targeting high-risk segments of the base to improve the value of the products they receive. This, in essence, supports ARPU.

RGU net adds were also the highest since merger. This was achieved through the continued success of increasing triple-play, which has now increased by approximately two percentage points per quarter, since merger, now at 47%.

Now, I want to cover ARPU. The record gross connects that I talked about on the previous slide is testament to the compelling value of our acquisition pricing. However, as Jim discussed earlier, like many businesses some of our existing customers are on historic pricing plans, which don't offer as good value as they enjoyed by new customers.

We have two methods of keeping these customers. Firstly, if they do call to cancel their service, our sales team has better tools at its disposal to assist the value of the customer and the flexibility to incentivize higher value customers to stay. This is evidenced in our save rate in Q3, which was up to 80%.

More important though is our proactive approach to churn reduction that we now employ. We have segmented our base into over 60 customer types based on value and risk of return or risk of churn, should I say. We ensure that high value/high-risk customers are contacted and incentivized to stay before they get themselves to trigger a disconnection.

This is the far more effective at creating a long-term customer relationship and a happier customer. In most cases, this can be achieved with minimal ARPU impact, for example, by adding an RGU without increasing the price the customer pays. But in other smaller cases, there is a direct impact on ARPU.

It is the combination of our competitive acquisition offers and provision of extra value to existing customers that have been the main cause of the ARPU decline in the quarter. We believe that this strategy will maximize value and generate longer-term growth at the possible expense of short-term ARPU decline.

We will try to mitigate this and protect ARPU whilst ensuring value per money by continuing to encourage customers to take more products from us, a skill that we have developed over the last few quarters. We will continue to aggressively up sell and cross sell and with the full quad-play at our superior products, we believe there continues to be a lot of upside here.

A skill that we're embedding and the tools that we're putting in place in terms of up sell give me confidence. Triple-play penetration and RGU per customer will continue to grow. Let's be clear here, market pricing has moved significantly down in the last 18 months and we're taking proactive steps to deal with this in a way that positions us best for medium-term growth, without damaging our current profitability.

We believe we are making the right changes for medium to long-term growth and continue to attack our OpEx costs. I'm pleased with the skills and tools we're building to better manage our consumer portfolio; investing in knowledge and systems in this area is a key focus. We're instilling strong disciplines around portfolio value creation.

I'll now talk briefly about each of our products, starting with broadband, which I'm pleased to say had a very good quarter. We added 123,000 customers including off net in the quarter, up from 86,000 in the same period last year and 50,000 last month. Although some of our competitors have not yet announced their results, it does look like we have sharply increased our market share for net adds in this quarter in excess of 20%.

Our strong broadband quarter reflects the quality and value of our service. More and more customers are joining us because they need the highest speeds available and the best quality of service possible. Our 20 meg product is the best available in the market and is the natural choice for home workers, gamers and those who just want fast, reliable, quality downloads.

The second chart shows the growth in broadband usage over the past few years and it's been immense with a CAGR of over 50% driven by new content and applications and higher access speed. This is part of a virtuous circle of content driving the demand for bandwidth, which in-turn drives the supply of more bandwidth hungry content and so on.

We are working within our content division to acquire and develop content and applications that work best with high-speeds, and example being the excellent Premier League English Football rights on our portal. Examples of high bandwidth Hungry applications that have been or are about to be launched by third parties are the BBC's iPlayer, Juiced, itv.com and 4onDemand.

These new applications will continue to drive demand for faster and better broadband. Despite our strong performance in the third quarter, I'm not satisfied that there is enough daylight between us and DSL in the eyes of the average UK Internet user. We still have not achieved our potential given the natural advantage that we have over copper.

This is something that I want to address and you will see increased differentiation in coming quarters. You will see product speeds well ahead of our current 2-4-20 meg offerings. You'll see an improvement in quality. You'll see an improvement in terms of the value added services that we've added into this area to differentiate us from the commoditized copper.

We know that DOCSIS 3.0 is a great opportunity for us and we're assessing our options and we will communicate our strategy in coming quarters. TV has improved significantly in Q3 and we're seeing the benefits of the market changing content initiatives that we've undertaken to differentiate our pay TV service.

Our key points of difference are our unique on-demand service, inclusion of premium sports content in our basic TV package and our market leading DVR, V+. The popularity of our on-demand service continues to increase, with an average of 17 views per user, up from 14 in Q2 and just 10 at the start of the year.

Our customers currently, have the choice of more than 4,300 hours of content per month and we have recently added about 1,000 music videos which are available for free to our top-tier basic TV customers. With an average of 45% of customers now using the service each month, the total number of monthly on-demand views increased to 23 million from 19 million in Q2.

The churn rate of customers who've recently used the VoD service is well below half of that of those customers who haven't.

The football season started in mid-August and our top-tier TV customers have been enjoying watching live Premier League Football Games on Setanta at no additional cost.

This has had an impact on TV upgrades from lower-tier packages to the top-tier and has favorably affected both acquisition and churn. Since the end of August, when we stepped up our marketing around the Setanta package, the weekly net adds run rate for TV has significantly improved, which provides me with confidence for Q4.

In partnership with Setanta, we'll launch a sports news channel on the 29th of November. We flagged a turnaround in our telephony customer trend in Q2 and I'm pleased to say that the improvement is coming well ahead of our expectations.

On-net adds were roughly flat in the quarter and we include off-net, then we added 14,000 telephony customers, marking the first increase in the telephony base since merger. For an incumbent, with well over four million customers, this is a great achievement. This turnaround has been driven through our successful bundling strategy, a refocus on telephony by both of our sales and marketing teams and the second quarter price rebalancing.

Also, driving down our overall churn rate had a disproportionately favorable impact on telephony, as telephony product penetration is higher than the other products. We believe our overall telephony offering on landline and mobile is best-of-breed in the UK and we intend to offer more total telephony packages as part of our bundled offering.

So, now mobile. Our nascent mobile cross sell product continues to experience strong demand, however, in the quarter we trialed a significantly less product to test demand elasticity. We reduced the inclusive tariff minutes and ticks too aggressively, in my view. This reduced weekly sales, which resulted in the reduced quarterly net adds number in Q3 versus the previous run rate. I think that we went too far here and we have reverted back to the original product and weekly sales have returned to the Q2 run rate.

I am pleased to report a significant improvement in the prepay performance in Q3 with net losses of 14,000 versus 99,000 in the second quarter and we've invested more into acquiring customers in a market environment that was more favorable than seen in the previous quarters.

We will always exercise financial discipline around lifetime value. If third-party acquisition costs are too high, as they were in the first and second quarter, we will adjust our acquisition strategy. We have now owned Virgin Mobile for over 12 months and have had a great year with strong OCF growth, which has helped us mitigate against our fixed-to-mobile substitution. It was a good investment.

Our content division had good revenue growth this quarter, up 8% on the previous quarter. VMtv revenue grew due to both subscription and advertising revenue growth, as a result of a strong viewing performance of our channels.

Sit-up also grew its revenue. In fact, revenue here is 11% on the same quarter last year. Commercial impacts, which are effectively the viewing of adverts on our channels, were up 19% year-to-date, both Living, our JV channel and our JV channel UKTV Gold, continued having great viewing share or greater viewing share than SkyOne.

On the 1st of October, we launched Virgin One on Freeview, cable and satellite. Our strategy here is to maximize advertising revenues from the nine million home Freeview platform and to cross promote our unique Video on Demand content and functionality, as well as our other products and services. Virgin One has had a great start and was the second most viewed multi-channel on launch night.

Looking now to our business division, the quality of revenue continued to improve with both the retail and data mixes better in the quarter. Although top-line growth has been relatively modest, retail data revenues have been strong and are up 16% compared to the same period last year. I think this division is often overlooked and underrated and is actually, a very successful business in its own right.

Our pervasive national network reach and superior economics gives us a competitive advantage in this space and allows us to serve a market, which is difficult for our competitors to serve economically.

We focus on supplying managed data services to national corporates, many of which are within easy reach of our existing network and can be connected at a relatively little cost, foregoing the need to employ expensive leased lines. This results in superior margins and cash generation relative to our peers.

Let me now turn back to our consumer products and the market that we operate in. You can see here, what we believe are the market growth characteristics and our positioning for our three main growth areas TV, broadband and mobile, split where relevant between the tiers. So, let's start with premium TV.

This market is not growing and requires heavy investment and content, primarily movies and sports, to compete. Due to content locked-up by our satellite competitor, this makes the economics here difficult for us to compete effectively. So, the opportunity for us here today is relatively limited compared to other opportunities.

Of course, as you know, we are addressing some of our concerns about market behavior to regulators and will continue to pursue all avenues to ensure a level playing field going forward. In basic pay TV, the market is growing nicely and is driven by choice and price.

We have well placed here with our wide range of Video on Demand functionality and content. We also offer some richer content than our competitors. For example, we include standard sports and live premiership football in our basic packs.

In free DTV, Freeview leads the market with nine million homes and growth is continuing, however, many of these consumers are dissatisfied with the range and choice of content. By bundling with a phone line and giving access to extinctive VoD content, we can offer greater choice and then we have the opportunity to try and up sell and cross sell other services. We want to take advantage of the appetite of consumers who get the taste of multi-channel television through Freeview.

In mobile, we are under penetrated in the high-value contract market, which represents about two-thirds of the market revenues. So, this is a key area of growth for us. Our positioning is to cross sell a great value for money product to our own existing cable customers at low SAC and therefore great economics. We're also in a very strong position to capitalize on convergence.

In broadband, we have the strongest position. It is a fast growing market and we have the best product and the best economics due to the ownership of our own state-of-the-art network, which has fiber much closer to the home than all of our competition. This means we can offer great value and quality at both the top and the bottom of the market.

Therefore, broadband offers us the greatest opportunity aimed differentiation and should be our hero product backed up in the bundle by differentiation in basic and free TV, mobile contract and the great economics from fixed line phone. Quad-play remains an important driver and differentiator for us.

We are the lowest cost operator in the market due to our network economics and other operating efficiencies. This means that we should have the highest customer lifetime value when compared to our competitors at any given market price and customer tenure, allowing us to be highly competitive whilst driving shareholder value.

However, historically, our customer tenure has not been long enough to fully take advantage of our superior economics. And it's a no-brainer to realize that the best and easiest way to create value in this business is to reduce our churn rate. I have made this my number one priority and will take you through how I intend to achieve this.

On this slide, I've set out the three leading ultimate causes of our customer's decision to churn. By far, the most important factor has been a lack of a single fit-for-purpose billing system covering all our customers.

Significantly, this number one reason to churn has been removed. As I said earlier, the on-net consumer billing system migration to the single ICOMS platform is effectively complete today, with just a small area of broadband provisioning for our ex-NTL customers still outstanding.

We made this project our number one priority and as such, it was completed early, on spec and the substantial resources that were employed on this project are now focused on our second most significant course of churn, product reliability and first time resolution. I want to drive quality end-to-end through our organization.

This has replaced the billing system as the number one project in the company and I will not let our focus deviate from this. I have restructured the organization to reinforce the importance and priority of this and I am confident that it will be as successful as the billing system migration was.

I already touched on the third reason for churn, which is the value for money issue around our existing customers. As I already said, we have started to actively address this issue in the quarter by implementing proactive retention activities based on customer value and risk of churn.

Targeting of churn is my number one operational objective and is the biggest driver of value in this business. I am very confident that we know the factors that cause churn and the steps we have taken and are taking will be successful in achieving significant churn reductions in coming quarters.

Now, let me hand over to Jacques.

Jacques Kerrest

Thank you, Neil. On my first slide, I will start with revenue. Consumer revenue has fallen by GBP11 million in the quarter, due primarily to a reduction in ARPU. As Neil has explained, we have adjusted our acquisition and retention pricing in order to successfully return to customer and RGU growth. Business revenue is up by 4 million pound, primarily due to growth in data revenue.

Our content revenue is up by 6 million with VMtv revenue up by 1 million due to the growth in both subscription and advertising revenue and with sit-up revenue up by 5 million due to increased retail sales. Mobile revenue was up by 12 million due to subscriber growth and improved contract mix and increased ARPU. The result of all this is a GBP11 million increase in total revenue for the company.

On the slide called Q3 OCF, as you can see, we have experienced strong growth in OCF this quarter, up 26 million to 342 million. There have been a few factors going in both directions that have affected OCF this quarter.

Firstly, our underlying SG&A has been reduced as we have continued to make cost efficiency driven by around 400 headcount reductions.

Secondly, there have been a number of favorable operational improvements which will have ongoing benefits, but have also resulted in larger onetime benefits within the quarter as set out in the slide. For example, due to operational improvements in our billing, collections and new customer acceptance procedures resulting from the integration of our billing systems, our bad debt expense was GBP7.5 million lower than the second quarter. Also, as a result of a revision of our expected payments under the company incentive scheme, the related expense was GBP8.5 million lower than on the previous quarter.

Within our content segment, we have favorable settlement of a couple of long-standing contractual issues resulting in gains of GBP4.7 million.

And finally, due to some senior management departures there were a number of forfeitures in our SBCE plans that contributed towards a GBP7 million, favorable movement on SBCE expenses.

We do not expect these same benefits to recur in the fourth quarter. Accounting rules, as Neil indicated, require us to take all the benefits in Q3, even though some of the benefits will be ongoing, such as, better bad debt performance, for example.

Some of the other major impacts on OCF in the quarter related to the investment in RGU and customer growth that you've heard Neil talk about.

We have also made disciplined investment in acquisition cost within our mobile business to improve prepaid growth.

And finally, we have continued to improve our content offering. For example, for mid-August, we have added Setanta channels to our top-tier basic packages and have also added premier ship clips to our broadband portal.

Turning to my next slide, I have set out some of the factors that will impact Q4 OCF. Firstly, we will continue to proactively invest in RGU and customer growth. We will be continuing to up sell and cross sell to support ARPU at the same time as growing customers and RGUs. With respect to mobile, we will deliberately drive increased acquisition cost in the fourth quarter to grow our customer base in the critical holiday season period.

The fourth quarter is also an important time for VMtv and we will be increasing our programming investment to secure improved advertising revenue for 2008. Let me remind you also, that Virgin One launched on October 1st, so there is extra investment in programming expense in the fourth quarter.

Finally, the benefits that I referred to in my previous slide are not expected to recur in Q4, although fourth quarter OCF will therefore be below Q3 GBP342 million. OCF for the whole second half of the year should be well above that for the first half of the year. It is now clear from the underlying Q3 OCF performance and the Q4 outlook that we will not hit the guidance we gave at the start of the year for 50% growth in free cash flow.

This has been affected partly by the customer losses earlier in the year and by our strategic decision to adjust our proposition and impact our ARPU in order to grow our customer base going forward. It has also been affected by the long-term investment we've made in content, such as Setanta and Virgin One. As Neil and Jim have outlined, we've made these investments in order to better position us for better medium and long-term growth.

We are currently working through our operational plans for next year and so we're not in a position today to provide updated guidance. Nevertheless, you have heard Neil talk about the challenge we have in respect to our pricing and how we intend to continue to attack our operating expenses in order to grow OCF.

I'll finish on our net debt position. As you can see, at the end of the quarter we have just over GBP6 billion of gross debt and we have GBP364 million of cash leading us with a net debt position of GBP5.7 million and the stronger OCF performance in the quarter has caused our leverage ratio obviously, to decline for the quarter.

And with that, let me turn it over for questions to the operator. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Bryan Kraft, with Credit Suisse. Please proceed.

Bryan Kraft - Credit Suisse

Thanks. I just had two quick questions. First, Neil, how far are you in that process of going through the back book of customers and either re-pricing them or putting them or giving them more RGUs with the same money, are we 10% there, are we 50%, 80% there? I’m just trying to figure out how many more quarters we may see some ARPU degradation as you work through that process?

And then secondly, I just wanted to see if you could comment on, there's been a lot of talk about you guys deemphasizing the Quad-play and selling wireless in the bundle. And you sounded a little more bullish on the opportunity and how it's been going. So, maybe you could just address that as well? Thanks.

Neil Berkett

Thanks Bryan. I'm not in a position to talk about the specifics of the way in which we work through our back-book pricing. I can say that we are making good progress. I can say that we are, each month that goes on, building and developing the skills around knowledge and investment in systems that allow us to do a better and better job of it.

It is my objective to ensure that the net present value of our portfolio going into 2009 is greater than the net present value of that portfolio as we enter 2008 and we will continue to provide information around that progress.

In respect to the Quad-play, you are quite right, Bryan. I like to think about us as being the agent that provides access to content and applications across all four of our products. And, therefore, the Quad-play is absolutely critical to us achieving that end.

It is critical, in fact, in terms of driving the ARPU that you were talking about earlier because it gives us the cross-sell and the up sell opportunity, something that we are proving to be quite good at. But within that, what I call our hero product, is clearly broadband.

And if you go back to the fundamentals of the DOCSIS network, we have advantage, yet at 2-4-20 meg, we're not really taking advantage of that. We can deliver 50 meg under DOCSIS 3 in pilots today.

So, you will see us roll out higher speeds, higher applications and higher quality in terms of our broadband network next year and broadband effectively spearheads our growth and our retention in the market, because that's where we have superiority.

But we also have superiority in the mid TV space on Video on Demand. So, that's a good product as well. So, I will just take advantage of your question to reemphasize the point. In our product to dealt Broadband is our hero product, but it is our hero product within the Quad-play.

Bryan Kraft - Credit Suisse

Okay. Thanks.

Neil Berkett

Operator?

Operator

And our next question comes from the line of Tom Eagan with Oppenheimer & Company. Please proceed.

Tom Eagan - Oppenheimer & Company

Feels great. Thank you very much. My first question is on phone. I was wondering if you could talk about what you are seeing in fixed to mobile substitution? For example, is it lower or more favorable in your VMED footprint versus in the non-VMED footprint? And if that fixed to mobile substitution has changed, I know it's early, but changed since you've offered the fixed mobile two-play and I have a follow-up? Thanks.

Neil Berkett

Okay, Tom. Clearly we're continuing to see both usage and price per minute come down in fixed line telephony less consistent with what's happening in the sector across the board. The good news is that we're offsetting that by ongoing growth in terms of our mobile business.

In terms of the specifics of fixed to mobile within segments, I'm not really in a position to comment on that. We are still overlaying our mobile knowledge over the top of our cable systems and to be able to address segmentation at that level is a bit beyond us at the moment.

And to be quite frank, it's not that relevant at the moment. The key thing is we have acquired a mobile business that provides across the board is clearly is the national footprint for us, an opportunity to be able to grow telephony whilst we manage the overall decline in fixed.

Tom Eagan - Oppenheimer & Company

Right. On synergies, maybe I missed it but could you go over again, where you are verses the GBP200 million run rate by the end of the year? And then lastly, on Freeview, at the lower base there, could you talk about what early results you've seen if any on migrating offering the VoD service to the Freeview subs? Thanks.

Neil Berkett

Sure, first one first, Synergies. We will meet the GBP250 million cash per annum guidance that we said by the 31st of December, 200 million of that being in OpEx.

If you actually look at the underlying OpEx for the third quarter and compare that to the third quarter of 2006, you'll see that underlying it is a circa GBP25 million lower. That's where you're seeing that those synergies come through, obviously inflation, investment in customer care, investment in some of the content for the sports portal, etc, provides you the balance to get to the 200 million. So, we've delivered those results.

Jacques Kerrest

I will add just one more thing. At the end of the year, we will give you a full reconciliation. But also in the same vein that Neil has talked about comparing 2006, we will be comparing 2005 with the fourth quarter of 2007 and you will see that we have more than 100 million. And if you have two years of inflations and so on, we will get to the 200 million of OpEx.

Neil Berkett

Thanks Jacques. In respect to your question on Freeview, Tom, we're actually seeing some encouraging results here. I refer to Freeview here, as the nursery ground and our ability to be able to provide either a dual or triple, i.e. all product buffer by the TV or in fact, the whole quad-play in there where we replace the DTT box with our own set-top box and enable Video on Demand.

About 20% of our subs are addressing the space. We affectively yield manage it, as well. We want to make sure that in a disciplined way, that we can generate the up sell and cross-sell from it, that's looking encouraging. And I do see it as a substantial growth going forward for the strategic slide we had in the pack.

Tom Eagan - Oppenheimer & Company

Great. Thank you.

Operator

And our next question comes from the line of Ben Swinburne with Morgan Stanley. Please proceed.

Ben Swinburne - Morgan Stanley

Thanks and thanks for taking the question, guys. Just one point of clarification, Jacque, if you could help on the fourth quarter, if we remove those onetime items in the third quarter OCF number, the result is somewhere around GBP310 million to GBP315 million, is that the number that we should be looking at as a base to then say you'll be down in the fourth quarter because of the Virgin Mobile seasonal spend?

Jacques Kerrest

Yes, you're correct. If you take down the four items, which are mentioned on page three of the press release, I think, you come up with 28 million and therefore, 314 million. I think against that you're right. We're going to have investment as we indicated, in our content business and also the Virgin Mobile issue. We're also going to have growth in the fourth quarter and therefore, the OCF will reflect that growth going forward.

Ben Swinburne - Morgan Stanley

Great. And Neil, if I could just come back to your points up front about the broadband business and the DOCSIS platform and I completely agree with your statements about taking back mind share on that, the ability of the cable plant to provide a better speed than over copper.

What do you think the realistic timing is and how should we think about the capital costs around moving the network to a DOCSIS 3.0 environment? And does that include a significant amount of node splitting as well, in addition to just moving to the DOCSIS 3.0 software and replacing of modems?

Neil Berkett

Ben, we haven't made the decision yet, as to when we will deploy DOCSIS 3.0. And in fact, we are working through how we will deploy that. It is likely that we'll retain DOCSIS 1.1 as a vehicle for our lower speeds. It's a very capital efficient way of moving into the new technology.

And then, you would roll DOCSIS 3.0 out for your high-end speeds. If for example, we were to move to 50 meg you may run DOCSIS 3.0 for 20 and 50 meg platform. All of that detail we'll work our way through.

Our current view is that we would roll that speed upgrade out through the course of '08 and into '09. And if we continue with that as an investment plan, if we were not to alter that speed, then we are comfortable that we could deploy that within the overall capital guidance that we give.

To remind everybody, that's 15% of our overall revenue which is currently, circa 600 million. So, if we were to change that as a profile, we would only be doing so because we believe that the net present value to be created from that was greater and we would talk to you about it. But we have no plans in that space at this stage.

Ben Swinburne - Morgan Stanley

Okay. Thanks a lot.

Operator

And our next question comes from the line of Paul Howard with Cazenove. Please proceed.

Paul Howard - Cazenove

Okay. Thank you, Ben, just a couple of questions. Going back to the issue of ARPU, I wonder, whether you would be prepared to say the size of discount that you are generally giving to customers as you look to proactively retain them.

And then a second question, I just want to understand the issues around churn. I think you said in the quarter that you had an 80% increase in your save rates when a customer was threatening to leave you and yet the fall in churn was relatively small.

I'm just trying to understand, how those two statements are consistent and what I'm missing in that? Thank you.

Neil Berkett

No, what I said, Paul, in respect to the churn is that our save rate was 80%, not an 80% increase in our save rate. So that is an improvement. But we're getting much better at saving our customers but also saving them with a lot more knowledge at the front end.

So, we're deploying real-time tools to be able to -- so our advisors can actually see the value of customers and ensure that the save is long-term or lifetime value generative.

At the end of the day, if we don't alter the value that we're giving our customer by either a price reduction or an increase in the value we're giving them, then they'll alter it for us and they'll walk. So, we're far better managing that in a proactive way.

In respect to, you spoke about ARPU. We're not in a position to talk about the individual price changes because if you think about the number of customers, it alters customer-by-customer.

Our objective is to mitigate price reduction in an ARPU sense by cross-sell and up-sell and also to be able to provide those customers, for example, that are on our large product no price increase but give them our extra large product.

So, it is a very complex portfolio management. We've imported a lot of skills into this space, both technically in terms of building the technical capability, but also with people from retail financial services who have similar issues, from some of the telcos, who have similar issues who have built some great knowledge systems.

What we do have is we have the confidence that we utilize lifetime value and net present value in every decision we make around our pricing, whether that be acquisition or retention.

That's how I can talk about the value of our portfolio. If you think about what it is, it's an annuity stream, which you should be able to value at any point in time. Our objective has to be to increase the value of that annuity stream overtime.

Paul Howard - Cazenove

Okay. Thank you. I just have one…

Neil Berkett

Sorry, can I just make one other point of clarification in terms of the churn? You made a comment that the churn hadn't moved that much in the quarter.

Third quarter churn is historically, the highest quarter, so to move 1.8 down to 1.7, it doesn't sound overly heroic, but I am pretty chuck with it, I have to say. Because traditionally, the September churn goes right up.

Paul Howard - Cazenove

Okay, I just have one follow-up, just on a separate issue. Have you had or are you able to have any sort of recent discussions with Sky on carriage? Or is it a case of waiting until we're through some of the regulatory reviews?

Neil Berkett

It's a good question and unfortunately, we continue to have discussions with Sky, those discussions are ongoing. We have not managed to reach a commercial settlement at this stage. We'll continue to do that.

I'll just pass over to Brian Hall, our General Counsel and he can just give you a general update in respect to our regulatory process.

Brian Hall

You can appreciate why Neil would refrain from commenting on the day-to-day discussions that we have with Sky. As, we have been engaged in a substantial regulatory efforts here working with Ofcom on the market investigation and we've also been engaged in a substantial lawsuit with Sky.

Ofcom is still undertaking a review of the detailed facts and other information concerning their market investigation and we continue to work with them and we look forward to them coming to the next stage of their investigative review.

Paul Howard - Cazenove

Thank you for that.

Operator

Our next question comes from the line of Omar Sheikh with Dresdner Kleinwort. Please proceed.

Omar Sheikh - Dresdner Kleinwort

Hi, everyone, it's Omar Sheikh from Dresdner in London. I've got three questions. First of all, I just wanted to make sure I understood what you're saying about managing pricing more proactively. If you look into the current quarter into Q1, it's very short-term. Is your initial focus going to be more on reducing the churn side, the retention side and or is it going to be more on the new customer acquisition side on pricing? Or, do you think you'll be able to kind of achieve or concentrate on both at the same time in the next two quarters?

My sense from what you were saying was that your focus was initially going to be much more on churn and just wondered where the new customer acquisition would fit in. So, some clarity on that would be helpful? And that's the first question.

The second question was just on churn. Again, I just wondered, where you think you could take churn to. Obviously, you've had a reasonably good performance this quarter. Historically, your trend has been as low as 1.3% back in Q1 of '06. I just wonder whether you thought getting it back down to that level was a reasonable expectation?

And then, finally, on the pay TV investigation. We're about seven months into the investigation. I think we're due to have a document later on this month from Ofcom. I wonder, whether you could update us on where you think you are with the process and what types of conversations you might have had today with Ofcom. And whether, in particular, you thought one of Sky's main arguments about maybe opening up the cable network to competition might be gaining some traction? Thanks.

Neil Berkett

Let me pick those off one-by-one. Our acquisition strategy continues, clearly we go into the market with a bundled proposition. Sometimes we'll lead with one of the products and follow with an up-sell. But we're starting to get the Virgin brand, as Jim was talking about earlier, is really starting to bite. We're hitting the market in terms of our bundles and our conversion rates are actually increasing.

So, I'm comfortable that our level of gross adds are about right. If they move up or down, it will be our assessment in terms of overall value creation. I'm going to be like a stock record, I am absolutely committed to making every pricing decision in our organization around creating customer lifetime value, not short-term revenue ups or down. So, you need to take the annuity stream every time, into account in making those decisions. So, that will continue.

In respect to churn, churn is not just about value for money. The underlying reason for churn, the number one reason for churn in our organization historically, has been our core building systems. The ex-NTL billing systems will not fit the purpose. We've got back and the majority of that is now behind us. All of our customer service reps are actually dealing on a single stream today. That's a major, major achievement so it sits behind us.

The secondary, or as I spoke about, is driving quality into the organization such that our products are more reliable and if something does go wrong, we address it first time. That's our number one focus at the moment. Those two items themselves will have an impact in terms of overall churn. It will not be the effort, we have to do around managing our incumbent customers that will drive that forward.

You asked the question secondly, in terms of churn targets, and ex-Telewest I think actually got as low as 1.1 at one stage. I think that is completely unrealistic. That was in a market where Telewest and NTL were not competing with each other, and they were the only organizations that were in the market as a triple-play at the time. We are currently at 1.7. Clearly, I believe that there is improvement to be had and we will strive to make that improvement. The market itself and our ability to compete will dictate how much better we get. But we know this is the shortest route for value creation and therefore we are making it our number one priority.

The reason that I spoke about it immediately after the billing conversion is I'm very proud of what the team has done in terms of those billing conversions. It just shows what can be done when you focus on a few big things and that's the approach I'm taking to reducing churn.

In respect to the pay-TV investigation, I really don't want to elaborate on that. We are in constant discussions with the regulators. We provided our thoughts in terms of that as a market along with BT, with Setanta, with Top Up TV. We look forward to the next report that comes out from Ofcom, and then I think, we'll be into next spring before we actually see the results.

Omar Sheikh - Dresdner Kleinwort

That's great. That's very clear. Thanks.

Operator

Our next question comes from the line of Joe Boorman with New Street Research. Please proceed.

Joe Boorman - New Street Research

Thank you. Just a couple of questions, please. Firstly, just to change the tune a little bit, Neil. Could you help us understand, is this really a one-off process on price? Do you think you go through the back-book once and then it stops or do you think they're trying to achieve a position in the marketplace and you'll price cut if you need to in the future to keep that position as you go forward?

Second question, you mentioned 15% and maybe I'm misremembering. I always thought sort of CapEx was 13% to 15% around there. And where you're thinking DOCSIS now should be nearer 15% for the next couple of years, CapEx to sales? Thank you.

Neil Berkett

Yes. We are not a price leader. We don't intend to be a price leader. We have a premium product. I think, particularly when you move into the decommoditized world of DOCSIS 3.0, high quality, high bandwidth, great applications, great content that drives that value, you don't need to be a price leader.

We intend to take the same position wherever we have a non-commoditized product. Fixed-line telephony is a commoditized product. We will move whatever the market needs to move to be able to protect our base there.

And I think the way in which we will compete going forward, it becomes more-and-more within the bundle. So, the reduction you're seeing in terms of ARPU is a reflection of the work that we're doing proactively, in terms of the bundle for our incumbent customers for our back-book. I don't see us, if the market moves again. We would need to take a position.

But I think, in fact, probably more importantly, let me just come back from pricing for a minute. Our cost to deliver to the home for the triple-play is superior to anybody else's, full stop today. So, our cost per serve, because we're on a single platform across cable, is significantly below either a mixed operator like Sky, where you satellite out an IP back in, or on a copper operator that's trying to run triple-play across copper like at Tiscali.

So, if you have a superior economic advantage and if you have a superior technical advantage, then exploit it. You don't need to do that with price. Our view is the route to value creation is to find the right price for our premium product, if that needs to be below or for some of our existing customers, but then to be able to keep those customers for longer, so that we exploit our better economic advantage.

In terms of CapEx, you're quite right. Our guidance is 13% to 15%. It's hovered between those on a quarter-by-quarter basis. That is our ongoing guidance. When we're in a position to know exactly how we're going to deploy 3.0 we'd be in a position to give you an update, but we are not altering our guidance in respect to the 13% to 15% range.

Joe Boorman - New Street Research

Thanks, Neil.

Operator

Our next question comes from the line of David Kestenbaum with Morgan Joseph. Please proceed.

David Kestenbaum - Morgan Joseph

Okay, thanks. Jim, can you just update us on the strategic review process? And then, can you talk about the quad, how many quad-play subs you have and what gives you confidence that you can start selling the quad-play more effectively? Thanks.

Neil Berkett

Okay. Jim, do you want to pick that up first?

Jim Mooney

Sure. There really isn't much to report. The interested parties have continued to do their work. Everyone is sort of just stalled waiting for the credit markets to open up again. As you all know better than I do, there have been some small deals done, the big 300 billion glut of credit is slowly working its way out. So, I think when you look at what we showed buyers in terms of our progress for the rest of this year and into next year, I think Neil and his team have clearly delivered on that. As a matter-of-fact, we've beaten the numbers that we've shown to the buyers in terms of great growth.

The cash flow point that Jacques made is really the law of small numbers. When you're saying you're growing cash flow 50% and it's a small number and you very consciously make decisions to invest in Virgin One, our VoD platform, Setanta, other content and then really go after the market with much better precision on your ARPU management, which Neil and his team have done, that is not worrisome at all to me, that's exactly what we should be doing.

So, I think if anything, we've strengthened our hand in this delay period in terms of how we're running the business and the results we're getting. And I think the second half volumes as we go into next year will be clearly superior to what we told buyers they would be back in the summer, when we were going through the management presentation.

I just remained very confident that when the market is clear and none of us really know exactly when that will be we'll be in very good position to take advantage of that. Neil?

Neil Berkett

David, in respect to quad-play, you can assume that the vast majority of every contract mobile we sell circa 90% is sold into the base. So, you'll see that effectively the quad-play or in fact the mobile penetration into a dual for that matter continues to grow.

It's interesting, when you look at some of the earlier statistics within Virgin Mobile for contracts that were sold uniquely, i.e. not into the base, the churn rate for those contracts was approximately double the churn rate for the contracts sold into the base.

So, early days, yes. But we are seeing the same economics moving from a triple to a quad as you were from a dual to a triple. So, that's very encouraging. As I say, still in a relatively low base, number of quad-plays is in excess of 100,000 so it's a small base, but it's encouraging news.

Operator

And then, next question comes from the line of Simon Weeden with Goldman Sachs. Please, proceed sir.

Simon Weeden - Goldman Sachs

Excuse me, if you've been asked this one. I think I did have a couple of questions, but most of them have been covered, to a degree. Going back on DOCSIS 3, it seems to suggest that you do expect to have 50 meg in the market commercially, next year. On what stage might that come in? And at what point, if there is a point, at which the saving of the CapEx there makes a different to what we're likely to see quarter-by-quarter, when would that come? Thanks.

Neil Berkett

Simon, I'm not making a guidance around the timing of launch of 50 meg. What I am saying is we will upgrade the speeds across our network during 2008. As you would understand, I'm sure the timing of such a rollout is a detailed planning process. We need to be able to maximize the opportunity in terms of clearly, speed to market that optimize the way in which we do that rollout, so as to ensure we don't end up with dead capital across a 1.1 network, particularly in the CPE space.

We will however, move from what is currently a 2-4-20 banding across our medium, large, extra large to faster speeds than that across the network, that's the statement I'm making today.

Simon Weeden - Goldman Sachs

And they stop this TV and will be available to customers during the course of the year?

Neil Berkett

Yes, they will be. For example, we have circa 300,000 customers today who are on 20 meg. So, we will move out two and four meg speeds and we will start to explore over the next 24 months what our top-end speed will be and the market and our prioritization will dictate when we do that.

Simon Weeden - Goldman Sachs

Okay. Thanks a lot.

Operator

Our next question comes from the line of Steve Malcomb with Arete Research. Please proceed.

Steve Malcomb - Arete Research

Hi there guys. Can I ask three questions please? The first is on off-net, which you haven't really mentioned that much in the presentation. And everything you're saying, Neil, I think sounds very sensible, but it's kind of inconsistent with an off-net strategy. You said, do less and do it well. You're talking about putting daylight between yourselves and competitors on cable planned versus copper planned. Do you still think doing off-net is a smart thing to do? First question.

The second is on your gross adds and CPE cost and you did obviously, a very good gross add number and your CPE cost actually fell. So your CPE progress add fell a lot in the quarter? Can you tell us a little bit about the mix of gross adds and why that happened, whether it's just broadband only subs in the mix that's driving that down?

And the final question is on the guidance. I appreciate you don't want a give '08 guidance at the moment. Do you think it's consistent or smart to have short-term free cash flow targets, which may not necessarily be consistent with value creation in the business along the lines that you've talked about and maybe more sensible to spend a bit more to drive the business long-term next year? Thanks.

Neil Berkett

I'll pick those up one-by-one. I didn't provide any update on off-net because there is no real update to be provided. We are on target to enhance our product set at the back end of Q1, beginning of Q2 in next year. That's when we'll be rolling out wholesale line rental and that's when we will be moving to the 4.5 million home footprint of cable and wireless. That will start to deliver better economics for us on that off-net and it will also perhaps, provide a critical element being wholesale line rental.

My position on off-net is that it makes sense. It is principally, a defensive strategy in that we have circa 170,000 customers a year that move off-net to be able to provide them with our medium product because basically, copper will not allow us to provide sort of bandwidth and speed that we would do for our extra-large product. It makes a lot of sense for me.

We're a national player. We spend tens of millions of pounds a year on national advertising and an element of that falls on deaf ears. So, it is a low capital, low-risk, make sure it works strategy. It is not top of the pile in terms of what we need to do in terms of capital investment.

In terms of your question around gross adds and CPE, it varies quarter-by-quarter in terms of how we deploy our CPE, where it's sitting in the refurb cycle, how much we acquire. So, any blip you see in a quarter is generally going to be a timing blip. There has been no radical change or material change into the way in which we deploy capital through CPE. So, no real change there.

Steve Malcomb - Arete Research

The gross adds that you're adding are pretty much the same gross adds in terms of RGU per gross add that you normally add, is that correct?

Neil Berkett

Yeah, in fact the back end of the quarter, I was very pleased with our triple-play penetration at point-of-sales. One of the things that’s been driving through that 200 basis points a quarter.

In terms of guidance, I really want to get ourselves into a position where we have a credible story. We talk about what we're doing and what the underlying metrics for that will be and we provide you with enough information for you to be able to work out your own short-term position. I mean, clearly we would need to talk to the market if we've got that wrong.

I think it's far more important that we can articulate how we create long-term value. And the route to long-term value is enhancing the value of our annuity stream on the top-line and driving efficiencies through our OpEx on the bottom line.

And hopefully today, we've demonstrated how we're going to go about that and the results as we roll through quarter-by-quarter. We can update you on our overall progress for that. I don't want to get into the position in terms of providing short-term guidance around the next quarter. I do want to get into the position to be able to create credibility around what we're doing to create long-term value.

Steve Malcomb - Arete Research

Just coming back to the first question on off-net, given what you've said on cable, you don't think it's given limited resources it would be more sensible to deploy those on expanding the cable footprint?

Clearly you have customers moving out of franchise, but you also have them moving in and the net effect of that should be pretty close to zero. If you're winning customers successfully would it not be more sensible to deploy some more cable plan than sort of go down the DSL routes?

Neil Berkett

Look, Steve, it's a good strategic question. In times, as all times are of making choices right from right, you have to need to make those decisions. I'll repeat what I said. I think today, off-net makes a substantial lot of sense. There is a lot of OpEx that flows over the top of beyond cable, our off-net proposition in terms of the way in which we spend nationally. We have a national proposition already in terms of mobile, but clearly in a capital trade-off position, I've been quite articulate in terms of where the priorities are for capital. The priorities for capital are ensuring we've got the best broadband network far none in this country.

Steve Malcomb - Arete Research

Okay. Thanks a lot.

Neil Berkett

Okay, just operator, last two questions. Thank you.

Operator

Our next question comes from the line of Jerry Dellis with JP Morgan. Please proceed.

Jerry Dellis - JP Morgan

Yes. Good afternoon. I've got three questions, please. Firstly, you've talked about rebalancing the tariffs on which your legacy customers currently reside. What proportion of that has been done so far? Are you in a position to tell us when you would expect ARPU to start stabilizing?

Secondly, looking back at this Q2 report, you actually said at that stage that cable churn, excluding the loss of customers on from Sky Basics, was 1.6%. So, on that basis churn has actually increased on a like-for-like basis this quarter. Is there something I'm misunderstanding there?

And then finally, if we consider pure overhead costs, what proportion of the integration benefits do you think would come through at the Q3 stage versus what's still to come? Thank you.

Neil Berkett

Okay. Let me pick up the first couple and I'll ask Jacques to answer the third in terms of percentage of overhead of integration costs coming through.

As I said at the beginning, Jerry, I'm not in a position. I don't want to talk about how far we are through the legacy tariffing. I'll repeat what I said with one of the opening questions. We were driving lifetime value, we're driving net present value, and as I said, I want to drive the business such that on the 1st of January, 2009 my net present value of our overall consumer annuity stream is greater than it is on the 1st of January, 2008.

What the mix of that is in terms of RGUs and ARPU will be a subject of what's happening in the marketplace. The most important thing is you drive and increase in terms of your month-by-month annuity stream. That's far more important than the number of RGU's in isolation of ARPU or ARPU in isolation of the number of RGUs. And in a way, you had seen some of the impact of having ARPU first, RGU second, in terms of lack of growth in the business over the last few quarters.

With respect to your question of Q2, you're absolutely right. We did provide a walk from 1.8 to 1.6 in terms of churn. The difference in terms of churn quarter-on-quarter is quite important. There's seasonality in terms of Q2 to Q3. If you look at Q3 churn in 2006 you'll see we moved to 1.8% in our Q3 churn in 2006 and we are at 1.7% in Q3 churn in 2007. So, that does reinforce the point that I made that there's been an improvement. So, you've got underlying seasonality, but overall, you've got an improvement in terms of churn.

In respect to OpEx and integration, we won't be going into too much detail here because we will be doing that, as Jacques said earlier, in terms of Q4. But I'll hand over to Jacques.

Jacques Kerrest

Thanks, Neil. The integration costs are obviously going down as we get towards the end of the year. And, as Neil has indicated, we'll give more color at the end of the year. But we also should tie this to what Neil said in terms of the integration of all the billing systems, which are almost finished for the company it will be finished by the end of the year. So, you can imagine that our integration costs are continuing to go down and as I said, we'll be through with this by the end of this year.

Jerry Dellis - JP Morgan

Sorry, my question wasn't really to do with sort of the restructuring costs themselves. In July, you went from three billing platforms to two, so presumably you took a chunk of cost out of the business at that stage, a chunk of ongoing overhead out of the business at that stage.

With rationalization to a single billing system in October, presumably there's a further chunk of cost that comes out of the Q4 stage. And what's the rough magnitude as to what was taken out in Q3 versus what will still come out in Q4?

Jacques Kerrest

Yeah. I don't think we are ready to give these details at this point. But remember that, as Neil has indicated, we're not completely through with it and the decommissioning of the old system is going through, as we speak. We just migrated the last NTL billing system just a few weeks ago, so you can imagine that we didn't turn-off the old system immediately. We still have some costs going on but we'll give more colors when we finish the 2007 year.

Jerry Dellis - JP Morgan

Okay. Thank you.

Jacques Kerrest

Okay. Last question. Thanks, operator.

Operator

Our last question comes from the line of Steve Scruton, with HSBC. Please proceed.

Steve Scruton - HSBC

Yes, hi. About the next generation broadband launch, DOCSIS 3 is 100 or even 160 megs in parts of Asia, do you see 50 meg as just the start? And do you anticipate a national launch or would you start say with the Telewest areas?

Neil Berkett

The speed that we run is our headline speed. We will be, what we think is appropriate as a commercial model in the UK. It's one of the reasons we're doing 50 meg trials and moving them into commercial trials, checking price elasticity, checking usage, checking what some of the great contents and applications you can use using such speed look like and how acceptable that is.

So, you're absolutely right. We have the capability to run much faster speeds and we may decide to launch with 50 meg and then move higher down the track. All of that still to be worked through in detail. I think the most important thing in terms of next-gen is that we're in a unique position to be able to deploy and we're in a unique position to be able to continue to grow our advantage in respect to quality and respect to speed. How we use it, we'll see.

Steve Scruton - HSBC

Thanks. And the Telewest versus NTL?

Neil Berkett

We have the capability to roll-out on a franchise-by-franchise basis. Effectively, we would drop 3.0 into the head ends and then you would exercise how you rolled it out affectively through CPE usage because you can't use your current CPE.

So again, it's early days in terms of how we would deploy and we have quite a substantial element of flexibility there. It will all be driven by what we think is the quickest route to value.

Steve Scruton - HSBC

Okay. Thanks very much.

Neil Berkett

Okay. On that, I'll pass over to Jim for a close as our Chairman. But thanks, everybody, for your participation. Jim?

Jim Mooney

Thanks, Neil. So again, I'm very pleased with the way the team has gotten the business on-track under the Virgin brand. I think Neil's point about lifetime customer management and managing the annuity is exactly the right point we should be on. And we are getting the volumes back up to very respectable levels while being very, disciplined. Financially listen, we're going to very carefully manage our ARPU going forward, we're going to use it as a weapon.

As Neil said, we have the lowest cost base in the country and the best product line so it would be very foolish not to use those weapons at our disposal. So, I think the team is off to a great start under Neil's leadership here. I'm looking for more great things as we go forward from the team. We've built a great team now and you can see the power of the Virgin brand really being exploited. So, a real good start. A lot of work to do, but I think the ship is clearly heading in the right direction, driving the volumes that will eventually lead to very respectable revenue growth as we get down the road some. But the lifetime management of our customer base is, key to that.

So, thanks for your attention this morning and we will look forward to talking to you again real soon. Thanks, everyone.

Operator

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.

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Source: Virgin Media Q3 2007 Earnings Call Transcript
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